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Tuesday, May 15, 2012

After Facebook IPO, Zuckerberg's hardest test awaits



Facebook is about to pull off a record-setting IPO, but Mark Zuckerberg will then need to satisfy added pressures on the company to boost its bottom line.

The clock is about to start ticking.
When Facebook goes public later this week -- potentially commanding a lofty valuation of more than $100 billion out of the gate -- the demands on the 28-year-old Mark Zuckerberg will far outweigh any sartorial silliness about what he should or should not wear.
Not that there is any immediate pressure to perform for Wall Street given the understandable excitement about the huge number of people using Facebook every month -- a customer base now approaching some 15 percent of the world's population. But honeymoons for newly public companies only last so long. Eventually, the excitement settles, and investors start to judge a business based on how quickly the CEO taps all that potential to grow top and bottom lines.
Already, there are concerns about what happens next. Facebook suffered a slowdown in its first quarter and the company anticipates its days of hyper user-growth are behind it. Simply put, there just are not a lot of Internet users left who are likely to join Facebook.
So now comes the hard part as Zuckerberg and his top technologists turn their attention to repair cracks in a franchise that investors will demand grows fast enough to justify its valuation. In coming months, watch these three key areas in particular.

Boost the ad business, don't tick off users
Wall Street largely views Facebook as what it is -- a new kind of media company. For now, that's a fair assessment. More than 85 percent of its more than $4 billion in annual revenue comes from ads on Facebook -- mostly smallish, display ads that marketers target at Facebook users via the treasure trove of data that Facebook knows about all of us.
This is not a small business, but so far it's largely a volume play: The revenue has grown as Facebook has added so many millions of users at such a fast clip. That's hardly ideal, given that its user growth is slowing. In short, it needs to up how much revenue it wrings out of each user.
Facebook's ads, meantime, have come under intense scrutiny. Some marketers have said flat-out that they don't perform well, while other frustrated advertisers have complained that they have tried in vain to give multimillion dollar campaigns to Facebook because Facebook isn't willing to work with them to come up with new creative approaches.
The challenge is to boost Facebook's ad business without irking its users. "The day you get on Facebook and there's a giant pulsating screen is the day Zuckerberg will want to die," said Jed Williams, a senior analyst with BIA Kelsey, a research firm focused on interactive media. "That's what Yahoo and AOL are for."
Facebook recently expanded so-called sponsored stories on the site so that brands can create stories that show up in a news feed of fans and their friends. Facebook also started Reach Generator with a splashy debut at New York's Natural History Museum in February, which courted big advertisers. What's more, Facebook has also created a group which is specially tasked with the outreach work on Madison Avenue to improving the company's agency relations.
But it needs more if it wants to boost its ad revenue. One possibility: Facebook creates (or buys) an ad network as a way to start serving targeted ads across the Web and outside of Facebook. The potential here is vast, given how so many sites now use Facebook Connect to let consumers log on with their Facebook credentials. This gives Facebook a wealth of data, and the bet is that it comes up with powerful way to deliver different types of ads that also incorporate activity on your social network. Maybe, for instance, the pull of a clothing store ad -- on, say, the Washington Post's site -- will have more sway when you see how many of your friends "like" it.
"Facebook's in an amazing position to use the social Web to socialize everything else," said Williams. "That's what they mean at Facebook when they talk about revolutionizing ads. ...Facebook Connect tethers Facebook across the broader Web."

Mobile madness: The more people use it, the less Facebook earns
When Zuckerberg spent $1 billion to buy Instagram, he did more than shock people with the price tag. He turned a spotlight on Facebook's mobile problem. The problem is simple to understand. Mobile is where the growth is -- it now has 488 million active monthly mobile users and climbing quickly -- and Facebook thus far isn't making money from it.
The company last week amended its S-1 filing with the SEC to underscore the challenge, and Zuckerberg reportedly told potential investors last week that mobile is his top priority for 2012. As well it should be.
As an ad play, mobile is a pain. Facebook just can't surface as many ads on a phone's screen. Facebook just rolled sponsored stories to mobile News Feeds as a way to make money from mobile users, but it's too early to tell if it will gain traction. What's more, the shift to mobile is just that -- users are going to Facebook via mobile instead of via their laptop or desktop, so Facebook is losing out where it does make money.

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